Wide-Ranging 2025 State Tax Debates Come into Focus

In the face of immense uncertainty around looming federal tax and budget decisions, many of which could threaten state budgets, state lawmakers have an opportunity to show up for their constituents by raising and protecting the revenue needed to fund shared priorities. Lawmakers have a choice: advance tax policies that improve equity and help communities thrive, or push tax policies that disproportionately benefit the wealthy, drain funding for critical public services, and make it harder for most families to get ahead. 

More so than in years past, state budget situations across the country this year are varied. Many states face or anticipate substantial gaps between revenue and spending that will undoubtedly lead to some combination of tax increases or program reductions. Even in states without forecasted deficits, revenues are often slowing, especially in places that have deeply cut taxes. 

This year, state lawmakers are bringing a mix of innovative and foolhardy tax plans to the table.  

Despite slowing revenue collections, some state lawmakers are continuing to push for top-heavy tax cuts. In this tighter fiscal environment, however, more of those cuts are being coupled with tax increases – often increases in consumption taxes that disproportionately fall to low- and middle-income families buying everyday goods and services.  

But that’s not the whole story. Some forward-thinking lawmakers are promoting ideas that would raise new revenue by asking more of well-off residents and profitable corporations. And others are aiming for modest tax cuts geared toward working class families that would bring more balance to their upside down tax codes.  

Efforts to tax the top, reduce regressivity

Governors in Maryland, Connecticut, Massachusetts, and Washington have set the stage for vital conversations around revenue and the need to move tax policies that ask more of those most able to pay. Meanwhile, the governor of Minnesota seeks to raise revenue from reforming the state’s sales tax base, with an eye on reducing regressivity.   

• As part of Maryland Gov. Wes Moore’s plan to deal with the state’s deficit, he has proposed closing corporate loopholes, increasing taxes on high-earners’ capital gains income, raising tax rates on income over $500,000, and eliminating itemized deductions – a policy that has long offered the largest benefits to high-income taxpayers. The overall revenue package would bring in nearly $1 billion a year right away by asking the wealthiest Marylanders to pay their fair share. 

• Connecticut Gov. Ned Lamont aims to reform corporate taxes in a number of ways, including by removing a harmful cap that allows companies to avoid Connecticut taxes by shifting their profits into low-tax states. This reform to the state’s combined reporting system alone would raise more than $80 million a year.  

• In Massachusetts, Gov. Maura Healey’s budget plan includes a handful of revenue raising provisions that would cap the state charitable deduction, close a variety of tax loopholes, and extend existing sales and excise taxes to some products not currently subject to these taxes. One proposal would ensure that nonresidents, and nonresident corporations that do business in the Bay State, are taxed on their income from sales of interest in pass-through entities. The plan would also expand which companies are included in a combined reporting group, eliminating preferential tax treatment of security corporations. 

• In his final budget proposal, former Washington Gov. Jay Inslee proposed a 1 percent tax on individual wealth above $100 million. Despite a tepid response from Washington’s new Gov. Robert Ferguson, key lawmakers in the state are gearing up to push for a range of revenue reforms: higher taxes on big corporations, lifting the limit on local property tax collections, and a new tax on multi-million-dollar residential properties. 

• Minnesota Gov. Tim Walz has proposed sales tax changes to reduce the state rate from 6.875 to 6.8 percent and expand the base to services like legal, accounting, brokerage, and trust services that aren’t currently subject to the tax. The change would increase revenue by $108 million a year and reduce the overall regressivity of the state sales tax.  

Many other states are working to identify tax increases that will stave off budget cuts. For instance: Maine Gov. Janet Mills has outlined plans to increase taxes on cigarettes, cannabis and casinos; Ohio Gov. Mike DeWine proposes raising taxes on tobacco and cannabis while increasing rates on sports betting; and Rhode Island Gov. Dan McKee’s budget includes a tax on digital advertising and higher taxes on cigarettes, electric vehicles, and short-term rentals through Airbnb and similar platforms.  

Deeper cuts to state income taxes

ITEP’s research has shown that the most equitable state and local tax systems include robust, graduated personal income taxes as a major component of their revenue portfolios. But lawmakers in some states—egged on by anti-tax lobbyists—continue to push for deep income tax cuts and even income tax elimination. Others are trying to chip away at state income tax bases by exempting broad swaths of income, like income from Social Security, tips, or overtime. Here are a few examples:  

• The Mississippi House passed a bill that would, over time, fully phase out the state’s personal income tax (with limited exclusions) and reduce the state’s sales tax on groceries (from 7 to 2.5 percent). To cover some of these costs, the legislation would raise motor fuel taxes and claw back state sales tax revenue that currently flows to municipalities, instead allowing them to increase their own local sales tax rates to make up for lost revenue. This tax swap would be deeply regressive and would come at a cost of $1.1 billion a year once fully phased in – more than 15 percent of the state general fund. A separate plan from the Senate would cut the state’s flat income tax rate (from 4.4 to 2.99 percent by 2030), reduce the sales tax on groceries from 7 to 5 percent, and increase the state’s gas tax. 

• In Kentucky, Gov. Andy Beshear recently signed yet another income tax rate cut into law. In 2026, the state’s flat income tax rate will fall from 4 to 3.5 percent, reducing annual revenue by about $700 million. This follows authorization of automatic tax cuts in 2022 that could eventually eliminate the state’s individual income tax. 

• Oklahoma Gov. Kevin Stitt has repeatedly called for individual income tax cuts and eventual elimination of the tax. He also supports a cut to the state’s business income tax. Lawmakers are weighing bills that would immediately cut personal income taxes and reduce the rate using a triggered reduction until the tax is fully eliminated.  

• In Missouri, Gov. Mike Kehoe has called for elimination of the state’s personal income tax. While he hasn’t identified specifics, legislative leaders have moved forward with proposals to cut income tax rates and fully exempt capital gains income from the tax – a move that would explicitly privilege income from wealth over income from work.  

• House lawmakers in Idaho passed personal and corporate income tax cuts that would drop the rate of both taxes from 5.695 to 5.3 percent at an estimated cost of $253 million annually. These cuts pile on top of tax cuts over the past four years that have cost the state nearly $1 billion in foregone revenue. 

Governors in Georgia, Montana, New York, South Carolina, Utah, and Virginia have also proposed reducing income taxes, in some cases at an accelerated pace compared to existing law. And legislators in a handful of other states are making similar pushes.  

Aside from rate cuts, many states are considering proposals to narrow the income tax base or restructure the tax to make it less able to raise revenue over the long run.  

• Proposals under consideration in Montana would cut the state’s top income tax rate as part of a drive to flatten the state’s bracket structure.  

• In Iowa, lawmakers are working to enshrine the state’s flat tax into the state constitution, thereby tying the hands of future lawmakers.  

• Meanwhile, Idaho Gov. Spencer Cox has proposed eliminating the state’s tax on Social Security income and lawmakers in Minnesota are pushing to do the same. This march toward carveouts for seniors worsens generational inequities at a high, and growing, cost to states.  

• Lawmakers in 20 states and counting have proposed bills to exempt tipped income from state income taxes, and many are also proposing bills to exempt overtime pay. These new tax carveouts would harm workers and consumers, open up new avenues for tax avoidance, and diminish progressive state revenue sources. Meanwhile, in Alabama, which created the nation’s first tax carveout of overtime pay, the policy’s cost has far exceeded expectations and lawmakers may allow it to expire. 

Pushes to steeply reduce property taxes

Many states are considering property tax cuts that are inextricably linked to efforts to undermine local governments and cripple local budgets. Since revenue from local property taxes accounts for over a third of public education funding, restraining local property tax authority is one way proponents of school privatization can hobble public education and make private schools appear more appealing. Some debates to watch include: 

• North Dakota Gov. Kelly Armstrong announced his plan to eliminate property taxes for most homeowners over the next decade. The plan, which would also establish an annual cap on local property taxes for all property types, follows a failed ballot initiative in 2024 that would have eliminated all property taxes in the state.  

• In Wyoming, the Senate has passed a bill to cut property taxes by up to 50 percent of assessed value up to $1 million for most residences. The bill does not make any effort to backfill lost local revenue with state dollars and would cost localities about $225 million a year. The House, to date, has twice delayed a vote on the bill. Their version lowers the cap on properties covered to $500,000 and would allocate a $100 million reimbursement to local governments for lost revenue. 

• South Dakota lawmakers have introduced legislation to raise the state’s sales tax rate from 4.2 to 5 percent to pave the way for the property tax levy for general education and special education being reduced to zero. This notion of swapping property tax revenue for deeply-regressive sales tax revenue is, unfortunately, increasingly capturing the attention of state and local lawmakers. Even worse, after backlash to the consumption tax increases Gov. Larry Rhoden says the legislature is likely to turn its focus to slashing public services to free up room for the property tax cuts. 

Florida Gov. Ron DeSantis also recently expressed his support for eliminating property taxes. Property tax cuts are also being discussed as high priority issues in Colorado, Iowa, Indiana, and Kansas, and are on the agenda in many more states. Many lawmakers say these moves are a response to concerns over housing affordability. While those concerns are well-founded, lawmakers have far better options than property tax cuts. Circuit breakers, vacancy taxes, and repealing assessment limits that drive up tax rates on new homeowners could all improve housing affordability without blowing a hole in state and local funding for education and other services. 

Boosting incomes with refundable credits

Lawmakers have homed in on the issue of affordability as everyday life has become more expensive. While many of the so-called fixes being promoted to address affordability miss the mark, some lawmakers are discussing tax policies that could make it easier for individuals and families to afford the basics. For instance:  

• New York Gov. Kathy Hochul has proposed increasing the state’s Empire State Child Credit. The increase would bump the credit to $1,000 per child under 4 and $500 for older children. The existing credit is set at just $330 per child, by comparison. 

• In New Mexico, lawmakers are pushing to double the amount of the state’s existing Child Tax Credit for children under age six, from roughly $600 to $1,200.  

• Virginia Democrats have proposed a fully refundable state Earned Income Tax Credit (EITC) at 20 percent of the federal credit.  

• Montana Gov. Greg Gianforte proposes increasing the state EITC from 10 to 15 percent of the federal credit. And a subsequent amendment would bring the credit to 20 percent of federal. Unfortunately, that increase would be coupled with a top-heavy income tax rate cut.  

• Ohio Gov. Mike DeWine included a young Child Tax Credit for children of working families in his proposed budget. The refundable credit of up to $1,000, depending on earnings, would provide a boost to children under seven. The maximum credit is available to eligible children if their parents are employed on a full-time basis before it begins phasing out.  

• And, in states across the country, lawmakers weighing property tax cuts are considering circuit breaker credits as a more targeted, precise means of cutting property taxes. Conversations of this type are playing out in Illinois, Indiana, Kansas, Missouri, Montana, and Ohio. 

States are charting a variety of very different courses on tax policy this year. Some are seeking to slash taxes for high-income earners and are willing to enact regressive tax increases or deep spending cuts to make that possible. Others are prioritizing working class families and middle-income earners and are seeking to ask more of those at the top who are faring extraordinarily well in this economy. 

Despite the approach, all state lawmakers are faced with the threat of federal funding cuts and the impact of those cuts on state budgets. Although federal funds are usually not discussed during state budget and tax debates, they are deeply integrated into service delivery and make up a large component of all state spending. How lawmakers will respond and how their constituents will get by will be decided in the coming months.  

Ultimately, we expect 2025—like most years—to bring a mix of steps forward and steps back on questions of state tax policy. To stay up to date on tax policy as it moves in the states this year, sign up for ITEP’s free Rundown email blasts, or bookmark ITEP’s State Tax Watch, which we’ll be updating throughout the year. 

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